Know Your Market

Milk Futures Will Remain on Edge, Along with Nerves

Aug 08, 2011

With cash markets and milk futures surging, the best way to navigate extreme prices is to stay consistent, remembering and sticking to your market goals.

By Steven Schalla, Stewart-Peterson

In the midst of a whirlwind of events impacting dairy prices, cash markets and milk futures have surged over recent weeks, returning to levels not seen since the spring of 2008. Spot cheese values have plateaued just over $2 per lb., and milk futures have matched the 2007 and 2008 highs at $21.50 per cwt.

This time around, however, many producers have told me that $21.00 milk doesn’t feel very historic or all that special. With current feed costs, and knowing that current profits are still rebuilding the balance sheet for many, this perspective is warranted.

On the other hand, it is still an exciting time for milk and dairy prices, given how elusive these levels have been. Last Friday, the July Class III price was announced at $21.39. This is about $6.00 per cwt. more than the Class III average over the past five years of $15.17. In fact, of the past 60 months, only five have seen an announced Class III price over $20.00. An additional nine months have been over $18.00, amounting to a mere 23.3% of the time the Class III prices has been over $18.00. (See chart below.)

This five-year perspective dates back to mid-2006 and the start of commodity price increases as a whole, including the grain and energy markets. Even considering these outside markets’ influence on dairy, historically speaking it is definitely a special time for milk prices.

It’s taken a combination of events to achieve these price levels for both dairy products and milk futures. Throughout the first half of the year, exports have been exceptional. Total cheese exports through May have increased 56% compared to a year ago, while total butterfat gained 74% from last year. In addition, milk supply has been slow to grow despite higher prices. Actually, supply growth has slowed significantly over the past 10 months from a peak of 3.34% in September 2010 to 1.07% in June 2011.

While the story has been supportive so far, milk futures will continue to watch these indicators. For example, Oceania cheese prices have recently set back to below $2.00/pound and processor comments suggest that exports have begun to slow. So, traders may start to scale back their expectations of cheese exports, putting pressure on milk futures. Another example is milk production trends. It is a well-known fact that production growth should be minimal for July and likely August too. However, what will happen in September and beyond?

Emotions in check

As we work with dairy producers through different possible price scenarios, conversations get particularly interesting and emotional because of the extreme prices. Individual perspectives range across the spectrum -- from blindly bullish and complacent to blindly bearish and worried sick. Of course, neither is healthy.

In our experience (and we’ve seen many milk price cycles), the best way to navigate extreme prices is to stay consistent, remembering and sticking to your market goals. Like athletes who sticks to their regular routine before the big game, avoid major changes now that will throw you further off balance. That means stay consistent with:

how you conduct your market analysis;

the type of positions or contracts you’ll utilize;

your risk level—do not suddenly become much more or less aggressive with you hedges without good reason;

your preparation—always do your homework and prepare for the unexpected price move before it happens.

If you’ve been frustrated with marketing results as the market has rallied higher, you won’t make it better by jumping in and out of the market based on your emotions. Keep your head about you. If you calculate your weighted average price for the year so far, you may find that you’re not really giving up as much as you thought you were in exchange for some important protection.

Remaining consistent, incrementally capturing more and more of this upward trend, will keep you best prepared for when prices swing the other way.

The data contained herein is believed to be drawn from reliable sources but cannot be guaranteed. Neither the information presented, nor any opinions expressed constitute a solicitation of the purchase or sale of any commodity. Those individuals acting on this information are responsible for their own actions. Commodity trading may not be suitable for all recipients of this report. Futures trading involves risk of loss and should be carefully considered before investing. Past performance may not be indicative of future results. Any reproduction, republication or other use of the information and thoughts expressed herein, without the express written permission of Stewart-Peterson Inc., is strictly prohibited. Copyright 2011 Stewart-Peterson Inc. All rights reserved.